Condo Associations Placing Greater Emphasis On Adequate Reserve

Funds

The roof shingles will deteriorate, the driveway will need a new surface and even the corridor carpeting will wear thin.

But unlike a co-op corporation, which can easily borrow funds for capital outlays to repair such conditions, a condominium association is not so fortunate.

Banks are still wary since the association has no collateral to pledge. And a special assessment creates too much individual hardship and internal strife.

``Raising the possibility of a special assessment is the best way I know to get lynched,`` said Bob Kirkland, president of Professional Property Managers Inc., of Virginia Beach, Va., which manages 72 associations.

No wonder more condo associations are placing greater emphasis on establishing and financing a well-thought-out capital reserves program.

A survey by the Community Associations Institute, a national network of condominium officers and their advisers, headquartered in Alexandria, Va., showed that in 1989 the need to build up reserves was the major cause of an increase in monthly common charges.

The use of the special assessment fell from 25 to 16 percent of the 230 associations surveyed in a nationwide random sampling.

A planned program of capital reserves is essential for other reasons, too, said Douglas Kleine, director of research for the institute.

The secondary mortgage market-investor pools that buy individual mortgages-now insists on assurances that such a program is in place. This means that a local mortgage officer will require the same verification before approving a loan on an individual unit.

Further, California, Florida and other states have laws requiring an association to provide unit owners with details of its capital reserve program on an annual basis. More states may follow.

(The Illinois law, that an association with a reserve fund must provide details annually, was expanded by Senate bill 742, passed in the last session of the Illinois legislature. The new law requires that all associations maintain reasonable reserves for repair or replacement of the common elements and that the annual budget of an association must contain an itemization for the amount of reserve funds, according to Mark Pearlstein, The Tribune`s condo columnist.)

And the American Institute of Certified Public Accountants is creating new guidelines that will require the inclusion of a capital reserve program in any audit of an association.

The basic tool to set up a program that will be acceptable to lenders and regulators is the reserve study, a blueprint for action that takes into account engineering factors such as the anticipated life of a roof or heating system, plus financial projections that compensate for inflation and the fluctuating rate of return on invested reserves.

A handful of companies, among them Association Reserves, of Calabasas, Calif., and Erickson Associates, of Orlando and San Diego, are beginning to specialize in this burgeoning field, combining engineering and actuarial expertise to arrive at an accurate figure for the amount of money needed and a timetable for expenditures.

If such a company takes over the job, expect to pay around $600 for under 40 units and up to $10,000 for 500 units or more, said Robert M. Norlund, president of Association Reserves.

Most condominiums, however, will begin by simply getting an engineer`s report. Kirkland recommends using only a licensed professional engineer as specialized knowledge will be needed.

Ideally, Kirkland said, the person also will have had experience compiling reports for buildings or developments that were being converted from rental status, since the work closely parallels the kind needed for a reserve study.

Condo officers should not rely solely on the cost estimates for replacement provided by such a study, managers said. It is wiser, they said, to get a precise figure by putting the items out for local bids.

``Each contractor usually knows his particular job and specialized local conditions much better,`` said Rhonda Major, senior manager with Bay Area Property Management, of Clear Lake City, Tex.

The rule-of-thumb is to have such a report updated every three years. After this, if the association does not have a management company accustomed to making up the funding and expenditures projections, the officers could use a computer program.

The Community Associations Institute favors ``Community Reserves,`` a program written by Craig Gilbert, an accountant in Atlanta. It costs $195

Major, like others, also favors an unallocated amount of around 3 percent of the total to cover such variables as a shorter-than-anticipa ted life of a particular system, or perhaps an upgrade to a product that is technically or esthetically more appealing.

Making certain that ongoing maintenance chores become part of the capital reserve progam also helps, Major said.

More detailed planning information is available in ``Reserve Study Guidelines`` a 120-page book costing $32.95, and ``Reserve To Preserve,`` a booklet costing $9.50; both are from Community Associations Institute. Write 1423 Powhatan St., Alexandria, Va. 22314, or call (800) 342-5224.